Please read through the article below and answer the questiong at the end of the article.

The Hidden Traps in Decision Making

Before deciding on a course of action, prudent managers evaluate the situation confronting them. Unfortunately, some managers are cautious to a fault taking costly steps to defend against unlikely outcomes. Others are overconfident underestimating the range of potential outcomes. And still others are highly impressionable allowing memorable events in the past to dictate their view of what might be possible now.

These are just three of the well-documented psychological traps that afflict most manag- ers at some point, assert authors John S. Hammond, Ralph L. Keeney, and Howard Raiffa in their 1998 article. Still more pitfalls distort reasoning ability or cater to our own biases. Exam- ples of the latter include the tendencies to stick with the status quo, to look for evidence confirming ones preferences, and to throw good money after bad because its hard to admit making a mistake.

Techniques exist to overcome each one of these problems. For instance, since the way a problem is posed can influence how you think about it, try to reframe the question in various ways and ask yourself how your thinking might change for each version. Even if we cant erad- icate the distortions ingrained in the way our minds work, we can build tests like this into our decision-making processes to improve the quality of the choices we make.

In making decisions, you may be at the mercy of your minds strange workings. Heres how to catch thinking traps before they become judgment disasters.

MAKING DECISIONS is the most important job of any executive. Its also the toughest and the riskiest. Bad deci- sions can damage a business and a ca- reer, sometimes irreparably. So where do bad decisions come from? In many cases, they can be traced back to the way the decisions were made the alter- natives were not clearly defined, the right information was not collected, the costs and benefits were not accu- rately weighed. But sometimes the fault lies not in the decision-making process but rather in the mind of the decision maker. The way the human brain works can sabotage our decisions. Researchers have been studying the way our minds function in making decisions for half a century. This research, in the laboratory and in the field, has revealed that we use unconscious rou- tines to cope with the complexity in- herent in most decisions. These rou- tines, known as heuristics, serve us well in most situations. In judging distance, for example, our minds frequently rely on a heuristic that equates clarity with proximity. The clearer an object ap- pears, the closer we judge it to be. The fuzzier it appears, the farther away we assume it must be. This simple mental shortcut helps us to make the continu- ous stream of distance judgments re- quired to navigate the world.

Yet, like most heuristics, it is not fool- proof. On days that are hazier than nor- mal, our eyes will tend to trick our minds into thinking that things are more distant than they actually are. Be- cause the resulting distortion poses few dangers for most of us, we can safely ignore it. For airline pilots, though, the distortion can be catastrophic. Thats why pilots are trained to use objective measures of distance in addition to their vision.

Researchers have identified a whole series of such flaws in the way we think in making decisions. Some, like the heuristic for clarity, are sensory mis- perceptions. Others take the form of biases. Others appear simply as irra- tional anomalies in our thinking. What makes all these traps so dangerous is their invisibility. Because they are hard- wired into our thinking process, we fail to recognize them even as we fall right into them.

For executives, whose success hinges on the many day-to-day decisions they make or approve, the psychological traps are especially dangerous. They can undermine everything from new- product development to acquisition and divestiture strategy to succession planning. While no one can rid his or her mind of these ingrained flaws, any- one can follow the lead of airline pilots and learn to understand the traps and compensate for them.

In this article, we examine a number of well-documented psychological traps that are particularly likely to undermine business decisions. In addition to reviewing the causes and manifestations of these traps, we offer some specific ways managers can guard against them. Its important to remember, though, that the best defense is always awareness. Executives who attempt to familiarize themselves with these traps and the di- verse forms they take will be better able to ensure that the decisions they make are sound and that the recommenda- tions proposed by subordinates or asso- ciates are reliable.

The Anchoring Trap

How would you answer these two questions?

Is the population of Turkey greater than 35 million?

Whats your best estimate of Turkeys population?

If youre like most people, the figure of 35 million cited in the first question (a figure we chose arbitrarily) influ- enced your answer to the second ques- tion. Over the years, weve posed those questions to many groups of people. In half the cases, we used 35 million in the first question; in the other half, we used 100 million. Without fail, the answers to the second question increase by many millions when the larger figure is used in the first question. This simple test illus- trates the common and often pernicious mental phenomenon known as anchor- ing. When considering a decision, the a stereotype about a persons skin color, accent, or dress. In business, one of the most common types of anchors is a past event or trend. A marketer attempting to project the sales of a product for the coming year often begins by looking at the sales volumes for past years. The old numbers become anchors, which the forecaster then adjusts based on other factors. This approach, while it may lead to a reasonably accurate estimate, tends to give too much weight to past events and not enough weight to other factors. In situations characterized by rapid changes in the marketplace, his- torical anchors can lead to poor fore- casts and, in turn, misguided choices.

Because anchors can establish the terms on which a decision will be made, they are often used as a bargaining tac- tic by savvy negotiators. Consider the experience of a large consulting firm that was searching for new office space in San Francisco. Working with a com- mercial real-estate broker, the firms partners identified a building that met all their criteria, and they set up a meet- ing with the buildings owners. The own- ers opened the meeting by laying out the terms of a proposed contract: a ten- year lease; an initial monthly price of$2.50 per square foot; annual price in- creases at the prevailing inflation rate; all interior improvements to be the ten- ants responsibility; an option for the Decision makers display a strong bias toward alternatives that perpetuate the status quo mind gives disproportionate weight to the first information it receives. Initial impressions, estimates, or data anchor subsequent thoughts and judgments.

Anchors take many guises. They can be as simple and seemingly innocuous as a comment offered by a colleague or a statistic appearing in the morning newspaper. They can be as insidious as tenant to extend the lease for ten addi- tional years under the same terms. Al- though the price was at the high end of current market rates, the consult- ants made a relatively modest coun- teroffer. They proposed an initial price in the midrange of market rates and asked the owners to share in the renova- tion expenses, but they accepted all the other terms. The consultants could have been much more aggressive and creative in their counterproposal reducing the initial price to the low end of market rates, adjusting rates biennially rather than annually, putting a cap on the in- creases, defining different terms for ex- tending the lease, and so forth but their thinking was guided by the owners initial proposal. The consultants had fallen into the anchoring trap, and as a result, they ended up paying a lot more for the space than they had to.

>> What can you do about it? The effect of anchors in decision making has been documented in thousands of experiments. Anchors influence the de- cisions not only of managers, but also of accountants and engineers, bankers and lawyers, consultants and stock an- alysts. No one can avoid their influ- ence; theyre just too widespread. But managers who are aware of the dangers of anchors can reduce their impact by using the following techniques:

Always view a problem from differ- ent perspectives. Try using alternative starting points and approaches rather than sticking with the first line of thought that occurs to you.

Think about the problem on your own before consulting others to avoid becoming anchored by their ideas.

Be open-minded. Seek information and opinions from a variety of people to widen your frame of reference and to push your mind in fresh directions.

Be careful to avoid anchoring your advisers, consultants, and others from whom you solicit information and coun- sel. Tell them as little as possible about your own ideas, estimates, and tentative decisions. If you reveal too much, your own preconceptions may simply come back to you.

Be particularly wary of anchors in negotiations. Think through your posi- tion before any negotiation begins in order to avoid being anchored by the other partys initial proposal. At the same time, look for opportunities to use anchors to your own advantage if youre the seller, for example, suggest a high, but defensible, price as an open- ing gambit.

The Status-Quo Trap

We all like to believe that we make de- cisions rationally and objectively. But the fact is, we all carry biases, and those biases influence the choices we make. Decision makers display, for example, a strong bias toward alternatives that perpetuate the status quo. On a broad scale, we can see this tendency when- ever a radically new product is intro- duced. The first automobiles, revealingly called horseless carriages, looked very much like the buggies they replaced. The first electronic newspapers ap- pearing on the World Wide Web looked very much like their print precursors.

On a more familiar level, you may have succumbed to this bias in your personal financial decisions. People sometimes, for example, inherit shares of stock that they would never have bought themselves. Although it would be a straightforward, inexpensive prop- osition to sell those shares and put the money into a different investment, a surprising number of people dont sell. They find the status quo comfortable, and they avoid taking action that would upsetit.MaybeIllrethinkitlater,they say. But later is usually never.

The source of the status-quo trap lies deep within our psyches, in our desire to protect our egos from damage. Breaking from the status quo means taking ac- tion, and when we take action, we take responsibility, thus opening ourselves to criticism and to regret. Not surprisingly, we naturally look for reasons to do noth- ing. Sticking with the status quo repre- sents, in most cases, the safer course be- cause it puts us at less psychological risk.

Many experiments have shown the magnetic attraction of the status quo. In one, a group of people were ran- domly given one of two gifts of approx- imately the same value half received a mug, the other half a Swiss chocolate bar. They were then told that they could easily exchange the gift they received for the other gift. While you might ex- pect that about half would have wanted to make the exchange, only one in ten actually did. The status quo exerted its power even though it had been arbitrar- ily established only minutes before.

Other experiments have shown that the more choices you are given, the more pull the status quo has. More peo- ple will, for instance, choose the status quo when there are two alternatives to it rather than one: A and B instead of just A. Why? Choosing between A and B requires additional effort; selecting the status quo avoids that effort.

DECISION MAKING

In business, where sins of commission (doing something) tend to be punished much more severely than sins of omis- sion (doing nothing), the status quo holds a particularly strong attraction. Many mergers, for example, founder because the acquiring company avoids taking swift action to impose a new, more appropriate management struc- ture on the acquired company.Lets not rock the boat right now, the typical rea- soning goes. Lets wait until the situ- ation stabilizes. But as time passes, the existing structure becomes more en- trenched, and altering it becomes harder, not easier. Having failed to seize the oc- casion when change would have been expected, management finds itself stuck with the status quo.

>>What can you do about it? First of all, remember that in any given deci- sion, maintaining the status quo may in- deed be the best choice, but you dont want to choose it just because it is com- fortable. Once you become aware of the status-quo trap, you can use these tech- niques to lessen its pull:

Always remind yourself of your ob- jectives and examine how they would be served by the status quo. You may find that elements of the current situation act as barriers to your goals.

Never think of the status quo as your only alternative. Identify other op- tions and use them as counterbalances, carefully evaluating all the pluses and minuses.

Ask yourself whether you would choose the status-quo alternative if, in fact, it werent the status quo.

Avoid exaggerating the effort or cost involved in switching from the sta- tus quo.

Remember that the desirability of the status quo will change over time. When comparing alternatives, always evaluate them in terms of the future as well as the present.

If you have several alternatives that are superior to the status quo, dont de- fault to the status quo just because youre

having a hard time picking the best al- ternative. Force yourself to choose.

End of Article

QUESTION:

In the article the author suggests that in when making decisions prudent managers evaluate the situation confronting them. In understanding the existence or potential conflicts presented by decision traps ... how much stock do you put into the notion of using this understanding to either change your way of thinking, overcome the problem or ignore the problem because its not that big of a deal ... or something else? Have you been faced with these issues in the past either through your own biases or through the biases of others? What have you done to overcome this, or to help overcome the consequences. Do you think knowing these things can help you be a better manager, leader or decision maker? Or is this just another idea to stick on a shelf? Provide a 2 ~ 4 paragraph response.